US economic recovery not as strong as previously thought

Mel Evans / Associated PressA worker guides a steel beam into place on a new building Friday in Seaside Heights, N.J. Builders slashed spending on commercial building projects at an annualized pace of 18.4 percent in the third quarter. That was, sharper than the 15.1 percent cuts previously estimated and contributed to the GDP downgrade.The U.S. economy grew at a 2.2 percent pace in the third quarter, as the recovery got off to a weaker start than previously thought. However, all signs suggest the economy will end the year on stronger footing.

The main factors behind the downgrade: consumers didn't spend as much, commercial construction was weaker, business investment in equipment and software was a bit softer and companies cut back more on inventories, according to Tuesday's report.

Despite the lower reading, the economy managed to finally return to growth during the quarter, after a record four straight quarters of decline. That signaled the deepest and longest recession since the 1930s had ended, and the economy had entered into a new fragile phase of recovery.

Many analysts believe the economy is on track for a better finish in the current quarter.

The economy is probably growing at nearly 4 percent in the October-to-December quarter, analysts say. If they're right, that would mark the strongest showing since 5.4 percent growth in the first quarter of 2006 -- well before the recession began. The government will release its first estimate of fourth-quarter economic activity on Jan. 29.

Yet even such growth wouldn't be enough to quickly drive down the unemployment rate, now at 10 percent. High unemployment and tight credit for both consumers and businesses are expected to continue to weigh on the economic recovery. Many economists predict the economy's growth will slow to a pace of around 2 or 3 percent in the first three months of 2010.

Growth in the final quarter is expected to be driven by companies restocking depleted inventories. Stocks of goods were slashed at a record pace during the recession. So even the smallest pickup in customer demand will force factories to step up production and boost overall economic activity in the final quarter.

Stronger sales of exports to foreign customers, as well as spending by U.S. consumers and businesses, also will help underpin fourth-quarter growth.

It's been a wild ride for the economy this year. In the first three months, it shrank at a pace of 6.4 percent -- its worst downhill slide in 27 years.

The recession eased in the second quarter, with the economy dipping at a pace of just 0.7 percent. The economy returned to growth in the third quarter.

But much of the third quarter's growth was supported by government stimulus spending. The "Cash for Clunkers" car buying rebates and an $8,000 tax credit for first-time home buyers buoyed sales of cars and homes. The clunkers program ended in August, though the tax credit has been extended and expanded beyond first-time buyers.

The government makes three estimates of GDP, which measures the value of all goods and services produced in the United States, for a given quarter. Each estimate is based on more complete data. The government's initial estimate for the third quarter was more energetic, showing the economy's growth at a 3.5 percent pace. Subsequent estimates, however, showed the recovery was actually slower.

Tuesday's report showed consumer spending grew at a 2.8 percent pace, slightly weaker than the 2.9 percent pace previously estimated and one of the factors behind the lower overall reading.

Retail sales, however, showed decent momentum in October and November, raising hopes that holiday sales would fare better than last year, which was the worst in nearly four decades.

Still, unlike previous economic recoveries, consumers, whose spending accounts for 70 percent of overall economic activity, aren't expected to solely power this one. Businesses and the government are having to pitch in more.

A trouble spot for the economy -- the commercial real-estate market -- was clearly visible in Tuesday's report.

Builders slashed spending on commercial building projects at an annualized pace of 18.4 percent in the third quarter. That was sharper than the 15.1 percent pace previously estimated and contributed to the GDP downgrade.

Business spending on equipment and software, meanwhile, grew at a 1.5 percent pace, less than the 2.3 percent growth rate estimated a month ago.

Furthermore, businesses cut inventories more deeply, by $139.2 billion in the third quarter. However, with inventories at rock-bottom levels, businesses are starting to replenish them, which should support the economy.

It's unclear how the recovery will fare once the government withdraws stimulus programs put in place to combat the financial crisis and the recession. If consumers pull back on spending, the economy could tip back into recession.

Economists at Capital Economics predict the recovery will slow, with the economy's growth fading to just 1.5 percent in 2011.

Against that backdrop, the Federal Reserve pledged last week to keep interest rates at a record low to help the recovery gain traction.

Faced with the prospects of high unemployment well into the 2012 presidential election year, President Barack Obama wants the government to take further steps to put Americans back to work. The House last week passed some provisions that Obama has pushed to aid job growth. But it didn't include new tax breaks for small businesses that hire.

The administration credits its $787 billion package of tax cuts and increased government spending with improving employment, though Republicans argue it did not help much.